How landlords can smoothly exit the BTL market
High interest rates, disappearing tax reliefs and worries over the future are sending landlords to sell up their portfolios despite increased rental incomes from today’s economic environment.
If you’re in the same position, we’ve compiled a blueprint for a strategic exit from the BTL market, ensuring a financially sound and stress-free departure for landlords ready to close this chapter of their investment journey.
Keep reading.
What’s happening with the UK property market?
Buy-to-let landlords have considered their options ever since the then-Chancellor, George Osborne, introduced a stamp duty surcharge on second properties in 2016. But this year might take the cake with landlords running for the hills.
Interest rates have risen sharply in the last 18 months to counteract rampant inflation, with the Bank of England holding rates steady at 5.25%. With many landlords holding interest-only mortgages, this has added hundreds, if not thousands, of pounds to monthly repayments.
Add in the rapidly shrinking capital gains tax-free allowance and no more ‘wear and tear’ allowance, and it’s even harder for landlords to turn a profit. The result? Landlords are leaving the BTL behind in their droves.
HMRC data found that in the 21/22 tax year, BTL landlords selling properties off was 0.5% higher than expected, with 153,000 properties sold. What’s worse is that 2023 isn’t the last of the property market’s woes: the International Monetary Fund (IMF) predicts interest rates will need to stay high until the end of 2024.
Landlords beware: The tax implications of divesting property
If you’re a landlord considering exiting the market, there are some vital things to consider to avoid falling into financial pitfalls.
Central to this is understanding how Capital Gains Tax (CGT) works for second homes. The tax rate varies based on your income tax band, and only the gain above the tax-free allowance is taxable. However, landlords can take advantage of tax reliefs that may reduce the bill. This includes Private Residence Relief if the property was once your main home and Lettings Relief under certain conditions.
It’s worth noting that the CGT tax thresholds have recently become less lenient. Since April 2023, the CGT tax-free allowance was reduced from £12,300 to £6,000. In April 2024, this will further decrease to just £3,000.
Stamp Duty Land Tax (SDLT) reenters the equation if you purchase a new property while selling your BTL investment. Although SDLT is not applicable on the sale itself, the additional 3% surcharge on purchasing new properties may affect decisions for re-investing in real estate.
It’s critical to speak to a tax professional who can help you go for a calculated approach that minimises tax implications and creates a smooth transition. A tax expert will also be up-to-date on any changes in legislation so you’re not caught out with an extra tax bill you weren’t expecting.
Exploring alternative exit strategies
If you’re a landlord and want to sell up, you might find it challenging to do so as purchasing rates have plummeted: in September, there were 43,300 mortgages approved, a 30% decline on 2019’s approval rate. With interest rates predicted to be high for some time, landlords may need to get creative with their exit strategies.
One option is to sell to another landlord. This route can be particularly appealing as it often allows for a seamless transition, especially if the property has sitting tenants. It not only avoids vacancy losses but may also fetch a premium from investors looking for immediate rental income.
For landlords with a long-term perspective, transferring property to a family member can be a strategic move. Although this option may offer tax efficiencies, such as reduced Inheritance Tax in the future, it comes with immediate CGT and SDLT considerations, so careful planning is needed beforehand.
Getting a professional involved
You might wonder why it’s worth shelling out for a tax expert when you’ve already got other selling costs to deal with. But navigating the UK's intricate tax landscape requires precision, especially when exiting the BTL market.
Tax professionals will first conduct a comprehensive review of the potential Capital Gains Tax (CGT) implications. They’ll let you know about which reliefs you qualify for and update you on any recent legislative changes.
Beyond CGT, these specialists ensure all income tax obligations from rental income are up to date, anticipating any final obligations that must be settled in the year of the sale.
By offering bespoke tax strategies and liaising with HMRC on your behalf, tax professionals are your stepping stone to ensuring your BTL property disposal wraps up without a hitch.
Final thoughts
The property market is in a state of serious flux in 2023, but the scene has been set for some years now for BTL landlords to sell their properties. With the insanely complicated tax landscape, landlords are best off consulting a professional to help ensure they’re minimising their tax liabilities as much as possible.
Need some help with the tax side of things for your BTL portfolio? Get in touch with BXD Accounting today for specialist advice.